Alternative Investments

Alternative investments

For most owners, a home represents their largest financial asset.  That familiarity becomes a natural bridge to decide to invest in rental property.

In a recent article, The Wall Street Journal reported that investors have rarely been this flush with cash.  The economic uncertainty due to the pandemic and the volatility of the stock market has caused assets in money-market funds to increase to approximately $4.6 trillion, the highest level on record according to Refinitv Lipper.

The question becomes should an investor be “out of the market” until things settle down or should they seek to find alternative investments to produce satisfactory results.  Even in the middle of this uncertainty, residential rental property has been a stable performer.

Rents are continuing to increase along with values.  Investor mortgages are available at 80% loan-to-value at fixed interest rates for 30-year terms.  Most other investments must be purchased for cash or at best, are limited to low loan-to-value loans, at floating interest rates for relatively short time frames.

The use of borrowed funds, especially at today’s low interest rates, contribute to the rate of return and in some cases, increase it.  This characteristic is known as leverage.

Income properties enjoy specific tax advantages like long-term capital gains rates lower than ordinary income rates, standard depreciation, which is a non-cash deduction, as well as expensing many big-ticket items in the year purchased.

Tax deferred exchanges are available for investors wanting to avoid the tax due on sale and defer the profit into the replacement property.

One of the most cited reasons people invest in rental homes is that they feel they are more in control.  They understand a rental home because it is the same type of property and requires the same maintenance as the home they live in.  They can make the decisions to improve it, repair it, what rent to charge and when to sell it.  For most owners, a home represents their largest financial asset.  That familiarity becomes a natural bridge to decide to invest in rental property rather than something they are less familiar.

If you’d like to know more about the benefits, download the Rental Income Properties guide and call me at  to discuss what kind of opportunities are available.

McKee Smith, REALTOR®, has been helping people like you sell and buy homes in the DFW area for many years. He is very knowledgeable about the housing market in Dallas and Fort Worth. He works out of his home in Coppell, Texas. He is a Senior Real Estate Specialist® (SRES®) and new home construction buyer representation certified.  Remember – McKee has the keys to selling your home!

Waiting to buy will cost more!

Waiting to buy will cost you more!

Mortgage rates have been kept artificially low by the Federal Reserve since the Great Recession in 2010. That is coming to an end!

Mortgage rates have been kept artificially low by the Federal Reserve since the Great Recession in 2010.  That is coming to an end! There is a whole generation of people who have never known what might be called normal mortgage rates.  And then, most of the rest of the adults in America have forgotten what average rates were in the 50’s, 60’s, 70’s, and especially, in the 80’s when they hit 18.45%.

The bottom of the market was February 2021 with 30-year fixed rates were 2.73%.  Current rates, as of February 10th, according to Freddie Mac, are at 3.69%.  Earlier predictions by the National Association of Realtors, Fannie May, Freddie Mac, and Mortgage Bankers Association were that rates would go as high as 4.00% by the end of the year.

Those estimates may be considered low now based on concerns about inflation and the federal government’s efforts to keep it under control.  The Fed has announced a series of policy rate increases for the balance of the year.  Mortgage lenders, in anticipation of the rate hikes, have already started raising their rates as evidenced in the rates since January 3, 2022.

It is possible that a year from now, 30-year fixed rates could be at 5% or above.  This could make a significant difference in a buyer’s payments especially compounded with rising prices.

A $450,000 purchase price today with a 90% fixed-rate 30-year mortgage at 3.69% has a principal and interest payment of $1,862 a month.  If things continue to heat up and the mortgage rate goes up by one percent while the price increases by ten percent, a year from now, the home will cost $495,000 and the payment would be $446 higher each month for the term of the mortgage.

Use the cost of waiting to buy to make projections on the price home you want to buy based on your own estimate of what interest rate and appreciation will do in the next year.

Acting now causes the payment to get locked in at the lower rate and the increase in value belongs to the buyer as equity build-up.  Unfortunately, with the current state of supply and demand on housing inventory, waiting to purchase moves the bar higher and higher until some buyers will not qualify.

For more information, download my Buyers Guide.

McKee Smith, REALTOR®, has been selling and buying homes in Dallas and Fort Worth for many years. He knows and understands the intricacies of the DFW housing market. He works out of his home in Coppell, Texas. He is a Senior Real Estate Specialist® (SRES®) and new home construction buyer representation certified.  Remember – McKee has the keys to selling your home!

Is a Home Inventory Necessary?

Is a Home Inventory Necessary?

“No one realizes how important a home inventory is until they have a loss.”

Most homeowners have insurance on their home that additionally, gives them coverage on their personal property.  That is the first level of peace of mind to know that it is available to you if there is an unfortunate need for it from burglary, fire, or some other insured circumstance.

Personal property is handled slightly differently than real property.  The claims adjustor could start by asking you for a list of the things lost.  You are allowed to reconstruct it but there is a distinct possibility that you’ll forget things, sometimes for months or years after the claim was settled.

An interesting exercise would be for you to visualize two rooms, possibly, the kitchen and main living area.  Without being in the room, create a list of all the personal items in plain sight and those in the closets and cabinets.  When you’re through with the list, go into each room to check to see what kind of things were not on your list and what the value of those items amounted to.  It could be substantial.

Remember, you are entitled to claim them regardless of how long it has been since you used them or if you do not intend on replacing them again.

When filing a claim, the more “proof” you have to substantiate it, the better off you are.  Receipts are great but chances are, you may only have them for the big-ticket items.  Photographs or videos of the different rooms are great records that the items were in your home.

An itemized list of each room with a description of the content, cost, and date of purchase, supported by pictures would be ideal.  This type of documentation will make filing and settling a claim much easier.   The more documentation you have, the more likely you are to have a favorable settlement.

The more expensive the item, the better it would be for you to have receipts, serial numbers, and photographs.  A simple count of some items like clothing will suffice like four pairs of jeans, 24 dress shirts, etc.  More valuable items of clothing like a cashmere jacket or a silk dress should be listed individually. 

Depending on the frequency that you purchase new items for the home or possessions, you’ll need to consider updating the list and photographs.  Moving creates opportunities to get rid of things that haven’t been used for years and to acquire things for the new home.  It is always a good idea to complete a home inventory after you’ve moved and settled into your new space.

If you would like to have more tips and a form to itemize your possessions, download the Home Inventory.  This will even allow you to include pictures and store them in digital format for safekeeping.

McKee Smith, REALTOR®, has years of experience in the DFW area housing market. He knows the many unique features of Dallas and Fort Worth area home sales. Remember – McKee has the keys to selling your home!

Thoughts on Credit and Getting a Mortgage

Thoughts on credit

“Even if you are not buying a home or getting a mortgage currently, it is a good routine to check your credit report periodically to discover signs of identity theft early.”

Credit plays a huge role in getting a mortgage because it is a variable that helps the lender determine the likelihood that the loan will be repaid on a timely basis.  Credit bureaus evaluate people’s credit worthiness using a FICO score.  The higher the score the better the borrower’s credit.

The mortgage rate charged to a borrower depends on their credit score.   There is an inverse relationship between credit score and interest rate changed.  The higher the score the lower the rate and the lower the score, the higher the rate. 

Two separate buyers with the same income, purchasing the same price home may both be approved by the lender, but they may be charged different interest rates based on their credit scores.

You could save thousands of dollars over the life of a loan by improving your credit score by just a few points.  A $350,000 mortgage at 3.5% has a principal and interest payment of $1,571.66.  Improving your credit score to qualify for a 3% rate would save $96.04 a month. 

Over the life of the mortgage, that would save $34,575 in interest.  Improving your credit score to shave 0.25% off the rate would make it worthwhile.

Credit utilization is the percentage of total credit used compared to the total credit available.  If you have a $2,500 balance on a credit card with $10,000 available credit, your utilization rate is 25%.  Ideally, it should be 10% or below.  This ratio accounts for 30% of a person’s FICO score. 

Credit utilization is calculated using the balance on the monthly statement so paying it off in full every month could still result in a high CU score.  Some credit counselors suggest paying down the balance before the end-of-month statement comes out.  A trusted mortgage professional can make specific recommendations like how to improve your credit utilization. 

Your credit score can be adversely affected if your credit limits are lowered.  You may have the same monthly outstanding balance you have had for years but it now becomes a larger percentage of your available credit and your score goes down.  In the example used earlier, if the available credit was lowered to $5,000 and your balance is $2,500, the credit utilization is now 50%.

Payment history is the largest contributor and counts for 35% of an individual’s FICO score.  It is an indication of your likelihood of paying on time and as agreed for your debt, especially mortgages, credit cards, student and car loans, among others.

A big shock to some borrowers is to find out that while they may have never actually incurred a late fee because of a grace period, their score could be dinged because it was not paid on time of the actual due date.

Foreclosures, deeds in lieu of foreclosure and bankruptcies will affect a borrower’s payment history as long as they appear on the credit report.

Americans are entitled to a free annual credit report by law from the major credit companies: Experian, TransUnion and Equifax.  AnnualCreditReport.com is the source for these federally authorized reports.   During the Covid-19 pandemic, they are offering free weekly reports.

Even if you are not buying a home or getting a mortgage currently, it is a good routine to check your credit report periodically to discover signs of identity theft early.

McKee Smith, REALTOR®, has been helping people like you sell and buy homes in the DFW area for many years. He is very knowledgeable about the housing market in Dallas and Fort Worth. Remember – McKee has the keys to selling your home!

First Love, Second Wife or Third REALTOR®

First Love, Second Wife or Third REALTOR

“Today’s environment requires a strong, sensitive agent who understands your goals as well as the intricacies of the market to be able to devise a plan to make it happen.”

There is a story of a real estate agent’s prayer: “Dear Lord, if I can’t be someone’s first love, or second wife, at least, please let me be their third REALTOR®.”  In a normal market with a balanced supply of sellers and buyers, this describes the preference that it might be better to be the third listing agent to help the seller after they became more realistic about their list price.

In today’s market, it might have more to do with buyers because of the increased competition, their chance of having an accepted offer is greatly reduced and it is only after they have lost several that they become more aggressive in the negotiations.

Competition for homes being sold has greatly increased over the previous two years, according to a recent REALTORS® Confidence Index Survey from NAR.   In April of 2021, there were nearly five offers for every home sold which increased from two offers in 2019 and 2020.

Utah reported the highest number of offers per home sold with seven while Arizona, Georgia, New Hampshire, and Washington had six.  California, Colorado, Tennessee, and Texas each had five offers per home sold.

To make their offers appear more attractive, more buyers are making cash offers to eliminate financing contingencies and reduce the chance of rejection.  Cash offers represented 25% of offers in April and 21% in the first quarter of 2021 compared to 18% in 2020.

Buyers who are not able to make cash offers are increasing their down payment.  Nearly half of homebuyers are putting 20% or more down during the first quarter of 2021.  Even first-time buyers are using an 80% mortgage to make their offers more attractive to sellers.

The median days on the market for listings was 17, down from 21 days a year ago.  31% of residential sales were made to first-time homebuyers which is down from 32% in March 2021 and down from 36% one year ago.

While nearly ¾ of homes closed on time, 5% were terminated and 22% were delayed but eventually went into settlement.  Appraisal and financing issues were the major contributors to the delayed transactions.  The two major factors for the terminated transactions were also appraisals and inspections issues. Today’s environment requires a strong, sensitive agent who understands your goals as well as the intricacies of the market to be able to devise a plan to make it happen.  Your agent and their recommendations for the other professionals involved are the boots on the ground necessary whether you are a buyer or a seller.

McKee Smith, REALTOR®, has been selling and buying homes in Dallas and Fort Worth for many years. He knows and understands the intricacies of the DFW housing market. Remember – McKee has the keys to selling your home!

Property Inheritance

Inherited property

“Stepped-up basis avoids recognizing the gain between the decedent’s cost and what it is worth when it is inherited.”

Stepped-up basis is an incredible benefit to people who inherit property.  Not only do they receive the property itself, but the basis or cost value of the property also becomes the fair market value at the time of the decedent’s death.  This avoids recognizing the gain between the decedent’s cost and what it is worth when it is inherited.

If a person had purchased a home for $100,000 and 20-years later when they died, it was worth $500,000, there would be a potential gain in the property of $400,000.  However, because of a tax provision called step-up tax basis, the person inheriting the property will have a basis of the fair market value at the time of death.

The recipient could sell the property for $500,000 and have no taxable gain on the sale.

A formal appraisal is the most reliable and defensible estimate of fair market value at the time of the decedent’s death.  There will be a fee of several hundred dollars for the appraisal.  Another alternative is to get a broker’s opinion of value in writing.  It may be reasonable to get three opinions to see if they are similar.  They should rely on comparable sales to justify their position.  Either method is acceptable to IRS.

There is a discussion from the current President about the possibility of eliminating the step-up in basis that allows families to leave assets to their heirs without having to pay capital gains tax.  Some people consider it to be a tax loophole for the ultra-rich but it can impact ordinary people who inherit property and do not want to have to sell it. 

An example would be a family farm that when inherited by the heirs may not be able to afford to pay the capital gains tax due at the time of transfer and they could be forced to sell the property or borrow the money to pay the tax, assuming that was possible.

The federal estate tax is paid from the deceased’s remaining estate, not by the heir.  If the decedent’s estate is approaching the limit before estate taxes are due, currently $11.7 million, professional tax advice should be considered because there could be additional provisions in play.  More information on this can be found on IRS.gov.

McKee Smith, REALTOR®, has been helping people buy and sell homes in the DFW area for many years. He’s helped many people buy, sell, and become better homeowners in Dallas and Fort Worth. Remember – McKee has the keys to selling your home!

Doing Nothing Costs Something!

Doing nothing

“Buyers are borrowing a large portion of the purchase price at around 3% interest but the entire value of the home is appreciating at a higher rate and the profit builds equity for the homeowner.”

It has been said that more money has been lost due to indecisions than ever was due to making the wrong decisions.  Many times, the larger the decision, the more likely procrastination comes into play, and doing nothing will cost something. 

Buying a home is certainly one of the biggest decisions people make.  Careful consideration and planning are necessary steps leading to a prudent decision.  Considering today’s market that includes a global pandemic, financial volatility, and rapidly rising home prices, it is understandable that many people thinking about a home purchase is in a wait-and-see posture.

However, there is a cost connected to waiting and it may be a lot more than you think.  The recent Home Price Expectation Survey 2021 Quarter two estimated appreciation rates will average just under 5% annual for the next five years.  It expects prices to increase by 8% in the next year. 

Being a renter or even putting off moving to a larger home, could keep you from enjoying the benefit of that appreciation.  If your down payment is in the bank, your expected earnings will be less than 2%.  In a home, the owner has the benefit of leverage when a mortgage is used to finance the home.

Buyers are borrowing a large portion of the purchase price at around 3% interest but the entire value of the home is appreciating at a higher rate and the profit builds equity for the homeowner.

Another major component for the owner is that the amortizing mortgage is being reduced with each payment that is made.  As the home goes up in value due to appreciation, the unpaid balance goes down with principal reduction creating equity from two directions.

If you waited one year to buy a $350,000 home today, the price could easily be $378,000.  A 5% down payment on this home at today’s price is $17,500.  If you could earn 2% on a certificate of deposit, it would be worth $17,850 in one year.  If it is used as a down payment on a $350,000 home that appreciates at 8%, the equity in one year would be $52,442. Use the Your Best Investment calculator to make your own projection.

Mortgage experts anticipate rates to rise by 0.75% in the next year which means that you’ll pay more interest on a larger mortgage by waiting.  The monthly payment could easily be $200 more by waiting a year.  Based on how long you intend to be in the home, it could make the overall housing cost much more.

To run some examples of projections based on your own expectations and at the price you are considering, go to Cost of Waiting to Buy and Rent vs. Own.

If you have some specific concerns that are keeping you from deciding today, let’s get together on the phone, an online meeting, or somewhere face-to-face so that you can get the facts about what it takes to buy a home now.

McKee Smith, REALTOR®, has been helping people just like you buy homes in the DFW area for many years. He can help you find and buy your perfect Dallas or Fort Worth home! Remember – McKee has the keys to selling your home!

The Dynamics of Home Equity

Home Equity

“The equity in a home is the difference between what it is worth and what is owed.”

For many people, their home is their largest asset and their best-performing investment.  The equity in a home is the difference between what it is worth and what is owed.  Two dynamics, appreciation and unpaid balance, work in concert to make homeowner’s equity grow.

It can be said that you appreciate the fact that your home is your best financial investment.  It is also ironic that the appreciation, the increase in value, is what causes it to be your best financial investment.

In a one-year period, the increase in value divided by the beginning value will determine the rate of appreciation for the year.  News stories and articles, frequently, report statistics on appreciation for the month, the year, or longer. In many cases, a national appreciation is mentioned but the local appreciation is more reflective of an individual property.

The National Association of REALTORS® reports “The median existing-home price for all housing types in June was $363,300, up 23.4% from June 2020 ($294,400), as every region recorded price jumps. This marks 112 straight months of year-over-year gains.”

The low inventory being experienced nationwide has caused some significant appreciation that has increased homeowners’ equity.  According to Black Knight, a mortgage technology and research firm, at the end of 2020, roughly 46 million homeowners held a total of $7.3 trillion in equity.

If a homeowner has a mortgage on their home, while the home is appreciating, the unpaid balance is declining.  An increasing portion of each payment is applied, when the payment is made, to the principal balance to retire the debt based on the term of the loan.

Each month the equity in the home becomes larger because the home is worth more due to appreciation and the unpaid balance is less due to amortization.

Once a homeowner has sufficient equity in their home, they can borrow against it and take cash out of their home.  Most lenders require that the homeowner maintain at least 20% equity position.  This means that owners can borrow up to 80% of the appraised value less the amount that is currently owed on the property.

The options include a cash-out refinance mortgage or a home equity line of credit, HELOC.  While some institutions have stopped offering HELOCs, they are still available.

 The HELOC is a line of credit that is established for usually ten years.  The owner is approved, and the money is available to draw out as needed.  The interest is calculated daily.  Like a credit card, when the balance is paid down, the unused portion of the available credit is available again.

McKee Smith, REALTOR®, can put you in touch with several lenders with whom he’s worked. He knows these lenders will try to get your loan approved with the fewest problems possible!

McKee Smith, REALTOR®, has been helping people buy homes in the DFW area for years. He can help you find your perfect new Dallas or Fort Worth home! Remember – McKee has the keys to selling your home!

Homeownership Cycle and Inventory

Homeownership Cycle

“Regardless of where you are in the homeownership cycle, having the facts essential to making a smooth move reduces the risk of bad outcomes.”

An interesting homeownership cycle begins with a starter home and progresses to larger and smaller homes throughout a person’s lifetime.  Within a few years after purchasing their initial home, they might move up to a little larger house.  The reasons could be that they simply want a larger home and can afford it, or their increased family size may be motivating the move.

While the children are small, they can probably get by with less space but as they grow and behave more like adults, even though they may not be, the need for more room becomes more pressing.  Depending on the size of the family, this will last some time and then, as they go off to college, enter the workforce and find their own living space, the parents may find that they no longer need the larger home. 

In the interest of saving money or possibly convenience, they migrate from a larger home to a smaller home until they consider an assisted living facility or possibly, a nursing home.  Another alternative, many homeowners are electing is to move in with their children or other family members.  Some homeowners are even retrofitting their homes with equipment and safety devices that will allow them to continue to live in their homes in old age.

According to the American Community Survey, a person in the United States can expect to move 11.7 times in their lifetime.  When that person is 18 years old, they can expect to move another 9.1 times and by age 45, they can expect another 2.7 moves in their lifetime.

One of the suspected reasons affecting the low housing inventory in America at this time is the group of homeowners who would move but are reluctant because the home will sell and with the shortage of homes, they may not be able to replace it with what they want.

The fact that builders have not kept up with the demand in the past twenty years has been a major contributor to the low inventory that housing is currently experiencing.  It is estimated that it will take two million new homes a year for the next decade to get caught up, assuming demand doesn’t increase.

There are also other factors involved like the fact that since 2007, the owner’s tenure in their home has more than doubled from five years to 10.6 years.  People are staying in their homes longer which means the homes are not coming on the market for sale.

Another consideration is that sellers with extremely low mortgage rates are reluctant to buy another house which would have to be financed at a higher rate than they are currently paying.

Regardless of where you are in the homeownership cycle, McKee Smith, REALTOR®, can provide important information and experience that is essential to making a smooth move.  Having the facts reduces the risk of bad outcomes.

No Need For Common Mistakes!

“McKee Smith, REALTOR®, is a valuable part of selling a home who can offer advice, bring perspective to the transaction, and suggest different ways to help you achieve your goals.

A successful home sale, considered by many owners, is to maximize their proceeds in the shortest time with the least inconveniences.  Just because it is a seller’s market doesn’t mean that homeowners can shortcut some of the steps that make it happen and they certainly need to avoid commonly made mistakes.

Pricing too high

Low inventory and high demand have contributed to the rising prices of homes.  NAR reports that the median sales price is up 17.8% in the past year and CoreLogic recently released data that July set new record growth of 18% year over year.  This might give sellers a false sense of security about overpricing their home

Pricing a home too high initially can limit activity, attract the wrong buyers and ultimately, cause the home to realize a lower price than optimum.  There is an interesting dynamic that takes place when there is a shortage of homes to show, and a new home hits the market.  Buyers, who have been in the market but not purchased yet, will rush out to see the home.  They are familiar with what homes are selling for and possibly, have even lost bids on one or more.

These savvy buyers expect certain amenities based on the price of the home.  They can tell if a home is priced right or not.

Failure to do Market Preparation

There are people who will buy a home that is not pristine and does not have everything in good working order, but they usually will not pay top dollar for the home.  They recognize the money that needs to be spent and will adjust the price accordingly.

To command the highest price, the home needs to be spotlessly clean with everything working as it should be.  The home needs to be depersonalized to appeal to the broadest group of people.  The clutter needs to be removed so it isn’t distracting or gives the impression that the rooms, counters, or closets are small.

It is important to evaluate if painting is necessary along with replacing floor covering, appliances, and/or light fixtures.

Thinking the agent doesn’t matter

Market time is down to 17 days and 89% of homes are sold within a month.  These statistics might be used to rationalize that an agent is not currently playing an important role in the home but that would be a mistake.

Nine out of ten homeowners use an agent, and the four most important reasons were to help sell the home within a specific timeframe, help price the home competitively, help the seller market the home to potential buyers, and help the seller find ways to fix up home to sell it for more money.

Being present during showings

It may not be convenient, but sellers should try to leave the home when it is being shown.  Buyers like to look at the home freely and ask questions or point out things to their agent.  Sellers may have the best of intentions, but they have not established rapport with the buyer and don’t really know what is causing the questions.

Not letting your agent negotiate for you

The role the agent plays as a third-party negotiator is one of the most important things an agent does for a seller.  It begins long before buyers even make an offer.  The protocol is for the buyer’s agent to go to the listing agent with the question and if necessary, they can ask you and get back to the buyer’s agent.

Buyers and sellers have inherently different objectives.  Sellers want the highest price and buyers want to pay the least.  Sellers want the terms of the contract in their favor and the buyers want them to favor them.  Buyers want lots of contingencies to let them out of the contract and sellers want the fewest possible contingencies.  Sellers want the most earnest money and buyers want to put up the least possible.

Agents are skilled at negotiation not only because of training but also experience.  Sellers’ experience is usually limited to personal transactions separated by years in frequency.   Agents see multiple transactions in their daily business and can guide people through difficult areas.

Not responding to offers in a timely manner

Normally, an offer can be withdrawn, at any time, up until the point that it is accepted.   The expression a bird in the hand is worth two in the bush reminds us that the offer you have is real and the ones in the bush, may never come to fruition.

A common situation occurs when there is large amount of activity on the home and an offer comes in quickly.  Instead of negotiating on that offer, the sellers wait to see if any better ones are received.  By waiting, the seller runs the risk of the buyer changing their mind.

Alternatively, in the same situation described, the seller may decide to put the home on the market on Saturday morning and let prospective buyers know that they will be deciding on all offers received over the weekend on Sunday evening.

McKee Smith, REALTOR®, is a valuable part of selling a home who can offer advice, bring perspective to the transaction, and suggest different ways to help you achieve your goals. When working with me, everything else will start to fall into place!